On the day we finalised this annual report, it was just one year ago when the war in Ukraine started. We have experienced the effects it had on our economy, albeit in no comparison to what it meant for the victims and the suppressed. Therefore, to make a forecast is extremely difficult, because it depends strongly on how this war will develop. Will it escalate, will there be peace, or will it proceed for a longer period.
According to The Dutch National Bank (DNB) the economy is expected to stabilise in 2023, with GDP growth of 0.8%. Growth will then pick up again, buoyed by temporary government policies to provide income compensation for high energy prices. Inflation is expected to have peaked in 2022. Price increases are likely to be less dramatic in the years ahead, given the anticipated energy prices and government measures. Inflation is projected to fall to 5% in 2023 and 2024, the year in which the government-imposed energy price cap ends. Core inflation will also remain high as a result of high energy inflation feeding through to the prices of other goods and services, the tight labour market and the economy’s high capacity utilisation rate.
In reaction to the high level of inflation, the ECB raised interest rates significantly in 2022. According to the ECB, interest rates will still have to rise at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target. Mainly as a result of rising interest rates and lower consumer confidence, the very strong rise in prices in recent years will level off rapidly with a fall projected in the next two years (source: DNB). In addition, the government is working on new policies that will affect the housing market. Due primarily to these factors, investment volumes are expected to decline and the competitive landscape of investors is also changing. However, despite short-term uncertainties, residential investments will remain robust in the long term. Demand for affordable homes is a fundamental driver of our business. Occupancy rates remain high, inflation protection remains intact in the long term, with stable direct returns as the backbone of our investments.
Subject to development of the war in Ukraine, the main market developments we expect in 2023 are:
Moderate slowdown in economic growth;
Inflation will fall, although the level will remain well above the long-term target of 2%.;
Decline in prices of owner-occupied houses;
Interest rates continue to rise due to monetary policy;
Rising initial yields;
Further delay in new housing projects, mainly due to current high construction costs, regulation and measures to limit the high level of nitrogen gas emissions and depositions;
Clarity on legislation regarding the new regulations in the mid-rental segment;
Acceleration of the energy transition;
Continued housing shortage, especially in the affordable segment;
Increased real estate transfer tax will make it difficult to sell assets and reinvest.
Furthermore, investments in sustainability will accelerate in the coming years. The European Union wants to encourage this by changing the legal and regulatory requirements and improving transparency and reporting on ESG-related matters. Investors will have to re-assess their portfolio tactics and are expected to sell assets that cannot meet the sustainability criteria. Dutch residential investments remain an attractive asset class, generating stable direct returns. While future regulation, high construction costs and rising interest rates are creating short-term uncertainty, the long-term outlook remains positive. Demand for affordable rental housing remains high, leading to high occupancy rates. In addition, investments in sustainable and affordable housing have a positive impact on society. Investments in sustainability helps the affordabilty for existing tenants, by lowering their energy costs. Furthermore, investments in new build projects for middle income households will provide affordable housing for future tenants.
A properly functioning housing market in which people who earn a middle income can buy or rent decent homes at a price they can afford contributes to a healthy economy and a stable society. It has a direct positive impact on mobility in the labour market and healthy consumer spending. This is ultimately a much better foundation for the value of our assets than scarcity, which is in the end always a temporary phenomenon.
Impact on our portfolio
These ongoing challenging market conditions could impact the performance of our existing portfolio. At the same time, some of these developments come with an upside. We expect our operational performance to remain solid, driven by a high demand for our mid-rental homes. However, high energy costs and inflation will keep pressure on the affordability of housing. Vesteda’s gross‐net ratio is also expected to be impacted due to higher maintenance costs. Due to rising interest rates, we expect a further cooling of the investment market and housing prices, resulting in negative revaluations. For Q1 2023, the draft valuation by the appraisers indicate a revaluation of around -5% on gross asset value (GAV).
Furthermore, the affordability of housing will continue to be a matter of concern. We believe the only way to resolve these shortages is to build more homes. However, there is a great deal of public and political pressure to implement regulatory measures. New housing regulations are expected to become effective in 2024. We will continue our active dialogue with the Housing Ministry and we will try to mitigate part of the impact by investing in these homes.
The additional investments will increase the quality of our assets and result in a future-proof portfolio, which will in turn reduce our overall risk levels. By complying with higher ESG standards and scoring better on affordability and sustainability, we can attract more green and social funding under favourable terms.
We will continue our strategy and aim to be the best landlord in the Netherlands. Our solid financial foundation and flexible organisation enables us to respond to market developments and puts us in a strong position to benefit from potential opportunities in the future.